Benefitfocus (BNFT) made its public debut on Wednesday, September the 18th. Shares of the provider of cloud-based software solutions ended their first day with gains of 102.1% at $53.55 per share.
At these elevated valuation levels, accompanied with the red flags outlined below, investors can do themselves a great benefit by staying on the sidelines, and not rushing into the insane momentum.
The Public Offering
Benefitfocus is a provider of cloud-based benefits software. It is designed for consumers, employers, insurance carriers and brokers. The company serves 20 million consumers in an integrated platform which allows consumers to shop, manage and find information about their insurances.
Benefitfocus sold 4.93 million shares for $26.50 apiece, thereby raising $131 million in gross proceeds. Some 3 million shares were sold by the company, raising $80 million. The remaining 1.93 million shares were offered by selling shareholders.
The public offering values the equity of the firm at $644 million. Initially, the bankers and the firm set an initial price range of $21.50 to $24.50 per share.
Some 20% of the total shares were offered in the public offering. At Friday's closing price of $50.91 per share, the firm is valued at $1.23 billion.
The major banks that brought the company public were Goldman Sachs (GS), Deutsche Bank, Jefferies, Canaccord Genuity, Piper Jaffray and Raymond James.
Benefitfocus simplifies the whole insurance process from sales, to enrollment and implementation. The personalized interface provides ease of use to customers, while centralized back-end operations keep costs low for employers.
The company focuses on the employer market, notably those who offer benefits to employees. Within this market, the company focuses on 18,000 US firms with over a 1,000 employees. Its platform is sold on a subscription basis. While contracts are typically multi-year, subscription fees are paid monthly on a SaaS-basis. The company serviced some 20 million consumers in June of this year.
For the year of 2012, Benefitfocus generated annual revenues of $81.7 million, up 18.9% on the year before. The company reported a net loss of $14.7 million, roughly the same as the year before.
Revenues for the first six months of the year came in at $48.2 million, up 24.5% on the year before. As expenses kept increasing, net losses increased to $15.2 million.
Benefitfocus operates with $13.7 million in cash and equivalents before the offering. The company has no debt outstanding. Factoring in the gross proceeds of $80 million from the public offering, and Benefitfocus will operate with a net cash position of around $85 million.
As such, Benefitfocus operating assets are valued around $1.13 billion, the equivalent of almost 14 times last year's revenues.
As noted above, the offering of Benefitfocus has been a great success, as shares have doubled on their first day.
Shares were already offered some 15.2% above the midpoint of the preliminary offering range. After witnessing opening day returns of over 102%, shares are trading with gains of 121.3% over the midpoint of the guided range at the moment.
The company which has been founded back in 2000, currently employs 853 workers. According to Benefitfocus' S1-Filing, research firm Gartner estimates that the US insurance industry spends about $55 billion on software and related services. More complex regulation leaves much room for Benefitfocus to simplify the process for all parties involved. Note that the overall insurance industry is huge as in the US alone over 300 insurance companies are operating. These insurers cover about 176 million individual consumers.
While the company operates in the "cloud", its margins and revenue growth are not that impressive. Note that gross margins for the first half of the year fell by little over a percent point to 43.6% compared to the full year of 2012. Operating expense rose by over 12 percent points to nearly 75% of total revenues. These additional investments, among others in selling and marketing efforts, had a modest effect on revenue growth. Growth in the first half of 2013 accelerated to 24.5%, compared to a full year growth of 18.9% for the full year of 2012. Despite the growth, the 10 largest customers still make up about 60% of total revenues, resulting in still quite some concentration risks.
There are some clear risks to this offering in my opinion. Trading around 14 times annual revenues is a steep multiple, especially if revenue growth of nearly 25% is solid, but not that impressive. Add to that rather slim gross margins for a cloud market, widening losses, and a large customer concentration. Perhaps even more red flags should go off when investigating executive compensation. Total compensation for the CEO, CFO and COO amounted to around $2.5 million for 2012, equivalent to some 3% of annual revenues.
Perhaps the biggest red flag is the fact that Goldman Sachs, which acts as underwriter in the offering, is also a selling shareholder. While it only sold 1.5 million shares, or almost 10% of its original stake, I generally am not a fan of these constructions.
All in all I pass on this offering. The very high valuation for this "cloud" company does not correspond with the real prospects of the business to my taste. There are many red flags as mentioned above. That being said, shares are no obvious short given the limited float and absolute valuation, making a post-IPO squeeze for early short interest potentially really painful.